How Directors Can Avoid Personal Liability For Their Directorship Actions

26 September 2019
 Categories: Insurance, Blog

As a director of an organization, disgruntled third parties may hold you personally liable for your organization's negligence. This is especially true if you were part of the activities that triggered the losses. Below are some steps you can take to limit your exposure to liability in such cases.

Avoid Conflicts of Interest

Before you accept the directorship of an organization, you should understand the organization's activities to rule out any conflict of interest. This is especially necessary if you are already the director of at least one other company. Other parties, such as clients of the organization, may use the conflict of interest to hold you liable for damages when things don't go their way.

Do Your Homework

You also need to scrutinize the organization's past practices, legal issues, financial issues, and other things that might trigger conflicts in the future. Find out the types of liability claims the organization has experienced in the past and how they were dealt with. There should be measures in place to prevent reoccurrences of similar issues.

Be Diligent in Your Directorship

Once you take up the directorship, you should do your best to carry out your assigned or expected duties. Delegation is good, but delegating controversial tasks or delegating too much, especially without close supervision, can be tragic. Get familiar with the organization's activities right from the start by asking questions, attending relevant meetings, and actively participating in its board. That way, you will not only reduce the risk of a mishap but also shield yourself from blame in case something does happen.

Encourage Checks and Balances

In many organizations, especially large ones, it's possible for one arm of the organization (such as the financial department) to engage in activities without the knowledge of another arm (such as the legal department). This is dangerous, especially for issues that are not exactly black and white. You need to institute or encourage, whichever is possible, checks and balances to ensure that everyone is aware of what the other is doing.

Encourage Internal Auditing

Lastly, you need to encourage internal auditing of the organization's activities. Do not just wait for an audit if something goes wrong; encourage periodic auditing even if everything seems to be running properly. The audits will keep people on their toes and reduce the risk of mishaps. The audits may also catch problems before they blow up in your face.

Despite the above measures, you cannot rule out the possibility that you will be held personally liable for your directorship duties. Therefore, you need protection from directors and officers insurance coverage. Encourage your organization to purchase commercial insurance coverage to protect the directors and officers of the organization from liability claims.